Life insurance is designed to provide a death benefit for your loved ones if you pass away. Long-term care insurance, meanwhile, can help pay for long-term care expenses while you’re still living. Having both types of insurance coverage could make your financial plan more complete, but that can get pricey. Purchasing a hybrid life insurance policy can allow you to meet both needs without doubling the cost. A financial advisor can assess your insurance needs and help you plan for the future.
What Is Hybrid Long-Term Care Insurance?
Hybrid long-term care insurance or hybrid life insurance is an insurance product that combines two types of coverage into a single policy. When you purchase hybrid life insurance, you’re getting both life insurance and long-term care insurance. This type of coverage can also be referred to as a linked-benefits policy as you’re getting two benefits in one.
The life insurance portion of a hybrid policy pays out a death benefit to the individual or individuals you name as beneficiaries when you pass away. The long-term care portion pays out benefits during your lifetime to cover the cost of long-term care.
Hybrid policies essentially allow you to get the best of both worlds since you don’t have to buy life insurance and long-term care insurance separately. For that reason, it can be an attractive option for financial and estate planning, as long-term care coverage can help you avoid having to draw down assets to pay for care later.
How Does Hybrid Long-Term Care Insurance Work?
Hybrid long-term care insurance assumes that you might need long-term care at some point. The long-term care part of the policy will pay out money to cover those costs when the time comes. For example, you could use funds from the policy to pay for a private or semi-private room in a nursing home if your health declines and you require round-the-clock care.
The long-term care part of the policy typically pays out benefits for a certain time period, up to a certain amount. So, your policy might pay $5,000 per month toward long-term care costs for up to 24 months. The maximum long-term care benefit would be $120,000.
If you require long-term care, you’d be able to collect those benefits from the policy to cover your medical costs. Once those benefits are exhausted, you wouldn’t be able to withdraw anything else from the long-term care portion of the policy. Any long-term care benefit used would be deducted from the death benefit.
Going back to the previous example, if the policy had a total death benefit of $500,000 your beneficiaries would be eligible to collect $380,000 of that if you maxed out your long-term care benefits. Hybrid policies can pay out a minimum benefit, typically in the range of $15,000 to $25,000, in situations where the long-term care benefits exhaust the death benefit.
Who Should Consider a Hybrid Insurance Policy?
Hybrid life insurance may make sense for anyone who wants to have life insurance coverage, while also creating some financial protection against the high costs of long-term care. A two-year stay in a nursing home could easily run into the hundreds of thousands of dollars, depending on the level of care you require and which facility you choose.
You could use existing assets to pay for long-term care but that may not be ideal if you’re hoping to create a legacy of wealth to leave behind for your heirs. In a worst-case scenario, you may be forced into selling your home and other assets to come up with the money to pay for long-term care for yourself or your spouse if you’re married.
Medicare doesn’t pay for long-term care in a nursing home, though Medicaid does. There is, however, a catch. To qualify for Medicaid assistance for long-term care, you must meet income and asset eligibility requirements. Again, you may need to spend down some of your assets in order to qualify for Medicaid.
Setting up a Medicaid asset protection trust is an alternative. That can be expensive, however, and you need to ensure that it’s done correctly in order to avoid putting your Medicaid eligibility at risk. A financial advisor or estate planning attorney can offer guidance on how to create a Medicaid trust and when it makes sense to do so.
Hybrid Long-Term Care Insurance Pros and Cons
Hybrid life insurance may be a better fit for some people than others. Comparing the pros and cons can help you to decide if it makes sense for your situation.
Here are some of the main pros to know:
Stable premiums. Hybrid policies can offer guaranteed premiums, so you don’t have to worry about them becoming more expensive over time. That’s a plus if you’re looking for coverage that will fit your budget now and for years to come.
Premium flexibility. Depending on the insurer, you may be able to pay for a hybrid policy in installments or a lump sum. You may prefer having more than one option for paying for coverage if you’re trying to plan ahead.
Potential cash value accumulation. If a hybrid life insurance policy combines permanent life insurance with long-term care coverage, you may benefit from cash value accumulation. Permanent life insurance can build cash value as you pay in premiums, which you can then withdraw or borrow against if needed.
Cost. Hybrid policies may be less expensive than purchasing a life insurance and long-term care insurance policy separately. Comparing rates and getting life insurance quotes can help you estimate what you might pay.
Now, here are some of the downsides of hybrid long-term care insurance coverage:
Waiting periods. Life insurance policies can have waiting periods that you must observe before any benefits can be paid out. Typically, that’s two years but hybrid policies may impose a longer wait before you can use long-term care benefits.
Reduced death benefit. As mentioned, using the long-term care benefits from your policy can reduce the death benefit that’s paid to your beneficiaries. They may still be able to receive a minimum benefit once you pass away but it may be much less than the original face value of the policy.
Inflation risk. Inflation can make long-term care more expensive, which can be challenging if your hybrid policy doesn’t offer built-in protection for rising consumer prices. In that case, your long-term care benefits wouldn’t go as far in covering your care.
How to Buy Hybrid Insurance
If you’re interested in getting a hybrid policy, it’s important to shop around and compare options. Specifically, consider:
- How much you’ll pay in premiums
- Coverage levels for both the death benefit and long-term care benefits
- Maximum payouts for long-term care benefits
- Premium payment options (i.e., lump sum or installments)
- How long-term benefits are paid and to whom they can be paid
- Whether the policy builds cash value
- What minimum death benefit is available if long-term care benefits exhaust the policy
You may also compare rates for life insurance and long-term care insurance separately to get an idea of what you might pay for each one. That can give you an idea of how much you might save with a hybrid policy.
Keep in mind that the younger and healthier you are, the more affordable life insurance is likely to be. In addition to health and age, your gender, family history, occupation and hobbies can also influence what you might pay for life insurance and hybrid insurance. Be aware that you may be required to complete a medical exam to get coverage.
The Bottom Line
Hybrid long-term care insurance can kill two birds with one stone, so to speak, by protecting your life and covering the cost of long-term care. The fact that coverage is not use-it-or-lose-it adds to the appeal of this type of insurance. While there are lots of options to choose from, the best hybrid policy for you is the one that offers the level of coverage you need at a cost you can afford.
Insurance Planning Tips
- Consider talking to your financial advisor about whether hybrid life insurance is something you might need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A long-term care annuity is another possibility for funding long-term care needs. Annuities are contracts that allow you to pay premiums to an insurance company, then receive payments back beginning at a later date. You could use payments from an annuity to pay for long-term care for yourself or a spouse, or simply provide guaranteed income for retirement. There are pros and cons to keep in mind, so it may be helpful to talk to your advisor about whether an annuity is something to consider.
Photo credit: ©iStock.com/Halfpoint, ©iStock.com/kate_sept2004, ©iStock.com/Apiwan Borrikonratchata